Is Yahoo, Microsoft pact bad news for Google?

AP

In this photo illustration, Microsoft Chief Executive Steve Ballmer, left, and Yahoo Chief Executive Carol Bartz are shown. Microsoft Corp. has finally roped Yahoo Inc. into an Internet search partnership, capping a convoluted pursuit that dragged on for years. The stage is now set for the two companies to make a joint assault against the dominance of Google Inc.

After months of wrangling – some of it played out loudly in the public spotlight – Microsoft and Yahoo today announced a 10-year global search and advertising sales partnership. The deal, which many analysts say could loosen Google's choke-hold on the search market, was announced with great fanfare in a statement from the Yahoo offices in Sunnyvale, Calif.

"For Web users and advertisers," the statement read, "this deal will accelerate the pace and breadth of innovation by combining both companies' complementary strengths and search platforms into a market competitor with the scale to fuel sustained development in search and search advertising."

If the partnership is approved by regulators, Microsoft would power Yahoo! search, while Yahoo! would control worldwide sales for both companies' premium search advertisers. According to Microsoft Chief Executive Officer Steve Ballmer, the deal will provide Microsoft's search engine, Bing, some much-needed scale, "which in turn will lead to more relevant ads and search results."

Backstory

Earlier this month, ComScore, a web tracking firm, reported that Microsoft had increased its share of the US Internet search market in June, the first month that Bing became widely available. Microsoft had 8 percent more of the search market in June than it did in May, while Yahoo’s search tool lost ground, capturing about 19 percent of the market. Google stayed more or less consistent, with 65 percent of all Web searches conducted in the States.

It's this last figure that was likely most troubling to Ballmer, who had long claimed not to have any interest in taking on Google directly. Consider this: In a focus test conducted in late June many users said they preferred the Bing interface. But in the end, 8 out of the 12 users said they planned on sticking with Google. No matter how hard Microsoft pushed its search tool, it would have likely been years before Bing made a dent in Google's search shares.

By teaming up with the No. 2 competitor, Yahoo, Microsoft could finally threaten the king of the search heap. "There’s no way to just change the whole game in one step,” Ballmer said in May. The sheer scale of this deal suggests he eventually began to think otherwise.

The aftermath

So how will the next few months shake out?

Well, as the Wall Street Journal reported early this afternoon, the deal is likely to face serious scrutiny from regulators. "The Justice Department will look at the deal carefully to be sure it doesn't harm competition by allowing two top Internet companies to team up," Fawn Johnson at the Journal writes. "The agreement also could receive attention overseas. The European Union has fairly broad powers to examine deals that involve potentially restrictive business agreements, and it also reviews mergers and joint ventures."

Meanwhile, the deal received a lukewarm reception on Wall Street. Shares of Microsoft stayed relatively level, but shares of Yahoo tumbled significantly, falling at one point by as much as 11 percent. Investor concerns center on the lack of an upfront payment from Microsoft to Yahoo – a payment that many had seen as a precondition for any agreement.

The giant weighs in

What does Google think about the whole arrangement? For now, at least, the company said it welcomed the partnership. "There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users," Google spokesman Adam Kovakovichtold Reuters.

Kovakovich, of course, is speaking from a position of strength. What will happen if "Microhoo" begins to nip at Google's heels? Shar VanBoskirk, search-market analyst at Forrester Research, told CNN that even if Microsoft doesn't unseat Google, the pact will be good for advertisers and consumers.

"Overall, the deal makes sense," VanBoskirk said. "It potentially creates synergies between the two firms – each had a gap the other one could fill – to create another one-stop-shop and a stronger second-place player."